All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

Indonesia steps up scrutiny of related-party transactions

The Indonesian Tax Office (ITO or DGT) is proactively approaching taxpayers and requiring them to answer queries and questionnaires.

The ITO has also asked the taxpayers to attend a training seminar conducted by the transfer pricing team from its head office. 

While no specific documentary requirements have been issued, it is clear that retaining detailed documentation that supports transfer pricing arrangements is now more important than ever. (DGT Regulation No. PER-39/PJ/2009, dated 2 July 2009; DGT Circular Letter No. SE-96/2009, dated 5 October 2009)

Included among many procedural changes announced in July is the requirement for three new related-party transaction forms to be submitted together with the corporate income tax return for fiscal year 2009 (accounting years ended after July 1 2009):

· Form 3A: Full details of all related parties transacted with and details regarding the transactions

· Form 3A-1: Fifteen yes/no questions regarding documentation held in relation to the arm’s-length principle, such as records held in relation to related-party transactions, comparative documentation and the transfer pricing calculation method

· Form 3A-2: Details regarding related-party transactions with companies in tax haven countries

In addition to these forms, the Indonesian Tax Office has approached a number of taxpayers with detailed transfer pricing and functional analysis questionnaires.

Also, local tax offices are seeking to use the tax audit process to challenge the transfer pricing policy adopted by various taxpayers. The Indonesian Tax Office has in certain cases sought to revalue related-party charges, and/ or made an assessment to treat certain related-party payments as a disguised dividend.

In October, the Office published a circular letter providing, as guidelines, benchmarking ratios that it would expect to see within certain industries. This includes ratios such as gross profit margin and operating profit margin. As these will be used in targeting taxpayers for transfer pricing queries and audits they may provide an indication as to when the Indonesian Tax Office is likely to challenge a given transfer price.

Recent regulations and a noticeable change in the Indonesian Tax Office’s approach indicate that related-party transactions are likely to come under increasing scrutiny in the coming years and that it may seek to assess a greater level of profit arising within Indonesia. As a result, taxpayers need to be aware that additional diligence, including full transfer pricing reviews, may be warranted to help show that the transfer pricing policy adopted is reasonable and appropriate.

Graham Garven, Partner, KPMG Hadibroto, graham.garven@kpmg.co.id



more across site & bottom lb ros

More from across our site

The UN may be set to assume a global role in tax policy that would rival the OECD, while automakers lobby the US to change its tax rules on Chinese materials.
Companies including Valentino and EveryMatrix say the early adoption of EU public CbCR rules could boost transparency of local and foreign MNEs, despite the short notice.
ITR invites tax firms, in-house teams, and tax professionals to make submissions for the 2023 ITR Tax Awards in Asia-Pacific, Europe Middle East & Africa, and the Americas.
Tax authorities and customs are failing multinationals by creating uncertainty with contradictory assessment and guidance, say in-house tax directors.
The CJEU said the General Court erred in law when it ruled that both companies benefitted from Italian state aid.
An OECD report reveals multinationals have continued to shift profits to low-tax jurisdictions, reinforcing the case for strong multilateral action in response.
The UK government announced plans to increase taxes on oil and gas profits, while the Irish government considers its next move on tax reform.
War and COVID have highlighted companies’ unpreparedness to deal with sudden geo-political changes, say TP specialists.
A source who has seen the draft law said it brings clarity on intangibles and other areas of TP including tax planning.
Tax consultants say companies must not ignore financial transactions in their TP policies as authorities, particularly in the UK, become more demanding.